A

RESEARCH PROJECT

ON

“TO STUDY THE IMPACT OF MONEY SUPPLY ON

COMMODITY FUTURES GOLD, CRUDE AND US DOLLER

VOLATILITY

FOR EIGHT QUARTERS (1 ST JAN 08 TO 31 DEC2009)”

SUBMITTED TO:

KURUKSHETRA UNIVERSITY, KURUKSHETRA,

IN THE FULFILLMENT OF DEGREE OF

“MASTER OF BUSINESS ADMINISTRATION (MBA)”

SESSION (2008-10)

SUBMITTED BY:

Vishal Luthra

S/o Sh Kharaiti lal Luthra

Class Roll. No. 1116/08

Univ.Regd. No. 04-rk-745

Univ. Regd. No…………..

UNDER THE SUPERVISION OF:

DR. VIKAS DARYAL

DIRECTOR TIMT, YNR

Tilak Raj Chadha Institute of Management & Technology (TIMT)

(Affiliated to Kurukshetra University, Kurukshetra and Approved By AICTE)

MLN College Educational Complex, Yamuna Nagar- 135001 (Haryana)

Ph. 01732-220103, 234110. Fax:+91-1732-220103 E-mail: info@timt.ac.in,

Web Site: www.timt.ac.in

CONTENTS

Declaration

Certificate from institute

Acknowledgement

Executive summary

Introduction

Profile of the study(Area\Organization)

Research Objectives

Theoretical Framework

Construct

Variables

Literature Survey & Review

Research Methodology and Analytical tools

Research Design

Sampling and Sampling Design

Analytical Tools

Statistical Tools

Data Collection Methods

Hypothesis Testing

Limitations of the Study

Results and Discussions

Policy Implications

Conclusion

Bibliography

Annexure

DECLARATION

I Vishal luthra, Roll No.1116/08, MBA (4th Semester) student of the Tilak Raj

Chadha Institute of Management and Technology, Yamunanagar hereby declare

that the Research Report entitled “Impact of moneysupply on fluctuations in

commodity futures with special reference to gold, crude oil and us doller prices

volatility for eight quarters (1st jan 08 to 31 dec 2009)”

It is an original work done by me under the guidance of Dr. Vikas Daryal, TIMT,

Yamuna Nagar in partial fulfillment of M.B.A Degree during academic year 2009-10. All

the data represented in this project is true & correct to the best of my knowledge & belief.

This work has not been submitted for any other degree/diploma exam elsewhere.

(Vishal luthra)

ACKNOWLEDGEMENT

A Project usually falls short of its expectation unless guided by the right person at the

right time. Success of a project is an outcome of sincere efforts, channeled in the right

direction, efficient supervision and the most valuable professional guidance.

This project would not have been completed without the direct and indirect help and

guidance of such luminaries. They provided me with the necessary recourses and

atmosphere conductive for healthy learning and training.

At the outset I would like to take this opportunity to gratefully acknowledge the very kind

and patient guidance I have received from my project guider Dr.VIKAS DARYAL

(Director), TIMT Without his critical evaluation and suggestion at every stage of the

project, this report could not have reached its present form. I would like to extend my

gratitude, to all the faculty members, TIMT for their moral support & guidance required

for the realization of this project report.

Lastly, I would like to thank my colleagues who gave me fruitful information to finish

my project.

(Vishal luthra)

Derivative market

Derivatives have had a long presence in India. The commodity derivative market has

been functioning in India since the nineteenth century with organized trading in cotton

through the establishment of Cotton Trade Association in 1875. Since then contracts on

various other commodities have been introduced as well.

Exchange traded financial derivatives were introduced in India in June 2000 at the two

major stock exchanges, NSE and BSE. There are various contracts currently traded on

these exchanges.National Commodity & Derivatives Exchange Limited (NCDEX) started

its operations in December 2003, to provide a platform for commodities trading.

The term “Derivative” indicates that it has no independent value. Its value is entirely

derived form the value of the underlying asset. The underlying asset can be securities,

Commodities, bullion, currency, Stock Index, live stock or anything else.

The term Derivative has been defined in Securities Contracts (Regulations) Act, as :-

“A Contract which derives its value form the price’s or index of prices, of

underlying Securities.”

There are two distinct groups of Derivative:-

Over-the-counter (OTC) derivatives are contracts that are traded (and privately

negotiated) directly between two parties, without going through an exchange or

other intermediary. Products such as swaps, forward rate agreements, and exotic

options are almost always traded in this way. The OTC derivatives market is

huge. According to the Bank for International Settlements, the total outstanding

notional amount is USD 298 trillion (as of 2005).

Exchange-traded derivatives are those derivatives products that are traded via

Derivatives exchanges. A derivatives exchange acts as an intermediary to all

transactions, and takes Initial margin from both sides of the trade to act as a

guarantee. The world's largest[2] derivatives exchanges (by number of

transactions) are the Korea Exchange (which lists KOSPI Index Futures &

Options), Eurex (which lists a wide range of European products such as interest

rate & index products), Chicago Mercantile Exchange and the Chicago Board of

Trade. According to BIS, the combined turnover in the world's derivatives

exchanges totalled USD 344 trillion during Q4 2005.

TYPES OF TRADERS IN A DERIVATIVES MARKET

Hedgers, speculators and arbitrators are the types of traders in derivatives market.

Hedgers :

Hedgers are those who protect themselves from the risk associated with the price

of an asset by using derivatives. A person keeps a close watch upon the prices

discovered in trading and when the comfortable price is reflected according to his

wants, he sells futures contracts. In this way he gets an assured fixed price of his

produce.

Speculators:

Speculators are some what like a middle man. They are never interested in actual

owing the commodity. They will just buy from one end and sell it to the other in

anticipation of future price movements. They actually bet on the future movement

in the price of an asset. They are the second major group of futures players. These

participants include independent floor traders and investors. They handle trades

for their personal clients or brokerage firms. Buying a futures contract in

anticipation of price increases is known as ‘going long’. Selling a futures contract

in anticipation of a price decrease is known as ‘going short’.

Arbitrators:

According to dictionary definition, a person who has been officially chosen to

make a decision between two people or groups who do not agree is known as

Arbitrator. In commodity market Arbitrators are the person who takes the

advantage of a discrepancy between prices in two different markets. If he finds

future prices of a commodity edging out with the cash price, he will take

offsetting positions in both the markets to lock in a profit. Moreover the

commodity futures investor is not charged interest on the difference between

margin and the full contract value.

CONTRACT TYPE UNDER DERIVATIVE MARKET: Futures /Forwards, which are contracts to buy or sell an asset at a specified future

date.

Options , which are contracts that give the buyer the right (but not the obligation)

to buy or sell an asset at a specified future date.

Swaps, where the two parties agree to exchange cash flows.

What is commodity:

A commodity may be as an article, a product or material that is bought and sold. It can

be classified as every kind of movable property, except actionable claims, money and

securities.

Commodities actually offer immense potential to become a separate asset class for

market savvy investors, arbitrageurs and speculators. Retail investors, who claim to

understand the equity markets, may find commodities an unfavorable market. But

commodities are easy to understand as for as fundamentals of demand and supply are

concerned. Retail investors should understand the risk and advantages of trading in

commodities futures before keeping a leap. Historically, pricing in commodities futures

has been less volatile compared with equity and bonds that provides an efficient portfolio

diversification option.

Meaning of commodity market: Commodity markets are market where raw or primary

products are exchanged. The raw commodities are traded on regulated commodities

exchanges, in which they are bought and sold in standardized contracts.

This article focuses on the history and current debates regarding global commodity

markets. It covers physical product (food, metals, and electricity) markets but not the

ways that services, including those of government, nor investment, nor investment, nor

debt can be seen as commodity. Article on reinsurance markets, stock markets, bond

markets and currency markets cover those concerns separately and in more depth. On

focus of this article is the relationship between simple commodity money and the more

complex instruments offered in the commodity markets.

Commodity market is an important constituent of the financial markets of any country. it

is the market where a wide range of products precious metals, base metals, crude oil,

energy and soft commodities like oil, coffee etc. are traded. It is important to develop a

vibrant, active and liquid commodity market. This would help investors hedge their

commodity risk, take speculative positions in commodities and exploit arbitrage

opportunities in the market.

evolution in India:

Bombay cotton trade association ltd set up in 1875 was organized futures market.

Bombay cotton exchange ltd. was established in 1893 following the widespread

discontent amongst leading cotton mill owners and merchants over functioning of

Bombay cotton trade association.

Leading commodity markets of India

The government has allowed national commodity exchanges, similar to the BSE

& NSE to come up and let them deal in commodity derivatives in an electronic

trading environment.

Multi commodity exchange (MCX) located at Mumbai

National commodity and derivatives exchange ltd (NCDEX) located at

Mumbai

National board of trade (NBOT) located at Indore

National multi commodity exchange (NMCE) located at Ahmedabad

FUTURE CONTRACT:

In finance, a futures contract is a standardized contract, traded on a futures exchange,

to buy or sell a certain underlying instrument at a certain date in the future, at a pre-set

price. The future date is called the delivery date or final settlement date. The pre-set price

is called the futures price. The price of the underlying asset on the delivery date is called

the settlement price. The settlement price, normally, converges towards the futures price

on the delivery date.

BASIC FEATURES OF FUTURE CONTRACT:

1.Standardization:

Futures contracts ensure their liquidity by being highly standardized, usually by

specifying:

The underlying. This can be anything from a barrel of sweet crude oil to a short

term interest rate.

The type of settlement, either cash settlement or physical settlement.

The amount and units of the underlying asset per contract. This can be the

notional amount of bonds, a fixed number of barrels of oil, units of foreign

currency, the notional amount of the deposit over which the short term interest

rate is traded, etc.

The currency in which the futures contract is quoted.

The delivery month.

The last trading date.

Other details such as the tick, the minimum permissible price fluctuation.

2.Margin:

Although the value of a contract at time of trading should be zero, its price constantly

fluctuates. This renders the owner liable to adverse changes in value, and creates a credit

risk to the exchange, who always acts as counterparty. To minimize this risk, the

exchange demands that contract owners post a form of collateral, commonly known as

Margin requirements are waived or reduced in some cases for hedgers who have physical

ownership of the covered commodity or spread traders who have offsetting contracts

balancing the position.

Initial margin: is paid by both buyer and seller. It represents the loss on that contract, as

determined by historical price changes, which is not likely to be exceeded on a usual

day's trading. It may be 5% or 10% of total contract price.

Mark to market Margin: Because a series of adverse price changes may exhaust the

initial margin, a further margin, usually called variation or maintenance margin, is

required by the exchange. This is calculated by the futures contract, i.e. agreeing on a

price at the end of each day, called the "settlement" or mark-to-market price of the

contract.

To understand the original practice, consider that a futures trader, when taking a position,

deposits money with the exchange, called a "margin". This is intended to protect the

exchange against loss. At the end of every trading day, the contract is marked to its

present market value. If the trader is on the winning side of a deal, his contract has

increased in value that day, and the exchange pays this profit into his account. On the

other hand, if he is on the losing side, the exchange will debit his account. If he cannot

pay, then the margin is used as the collateral from which the loss is paid.

3.Settlement

Settlement is the act of consummating the contract, and can be done in one of two ways,

as specified per type of futures contract:

'Physical delivery' - the amount specified of the underlying asset of the contract

is delivered by the seller of the contract to the exchange, and by the exchange to

the buyers of the contract. Physical delivery is common with commodities and

bonds. In practice, it occurs only on a minority of contracts. Most are cancelled

out by purchasing a covering position - that is, buying a contract to cancel out an

earlier sale (covering a short), or selling a contract to liquidate an earlier purchase

(covering a long). The Nymex crude futures contract uses this method of

settlement upon expiration.

Cash settlement - a cash payment is made based on the underlying reference rate,

such as a short term interest rate index such as Euribor, or the closing value of a

stock market index. A futures contract might also opt to settle against an index

based on trade in a related spot market.

Expiry is the time when the final prices of the future are determined. For many

equity index and interest rate futures contracts (as well as for most equity

options), this happens on the Last Thrusday of certain trading month. On this day

the t+2 futures contract becomes the t forward contract. For example, for most

Pricing of future contract

Futures

In a futures contract, for no arbitrage to be possible, the price paid on delivery (the

forward price) must be the same as the cost (including interest) of buying and storing the

asset. In other words, the rational forward price represents the expected future value of

the underlying discounted at the risk free rate. Thus, for a simple, non-dividend paying

asset, the value of the future/forward, , will be found by discounting the present

value at time to maturity by the rate of risk-free return .

This relationship may be modified for storage costs, dividends, dividend yields, and

convenience yields; see futures contract pricing.

Any deviation from this equality allows for arbitrage as follows.

In the case where the forward price is higher:

1. The arbitrageur sells the futures contract and buys the underlying today (on the

spot market) with borrowed money.

2. On the delivery date, the arbitrageur hands over the underlying, and receives the

agreed forward price.

3. He then repays the lender the borrowed amount plus interest.

4. The difference between the two amounts is the arbitrage profit.

In the case where the forward price is lower:

1. The arbitrageur buys the futures contract and sells the underlying today (on the

spot market); he invests the proceeds.

2. On the delivery date, he cashes in the matured investment, which has appreciated

at the risk free rate.

3. He then receives the underlying and pays the agreed forward price using the

matured investment. [If he was short the underlying, he returns it now.]

4. The difference between the two amounts is the arbitrage profit.

Benefits to industry from future trading:

Hedging the price risk associated with future contractual commitments.

Spaced out purchases possible rather than large cash purchased and its

storage.

Efficient price discovery prevents seasonal price volatility

Greater flexibility, certainty and transparency in procuring commodities

would aid bank lending.

Facilitate informal lending

Hedged position of producers and processors would reduce the risk of

default faced by banks.

Lending for agriculture sector would go up with greater transparency in

pricing and storage.

Commodity exchanges to act as distribution network to retail agri-finance

from bank to rural households.

Providing trading limit finance to traders in commodities exchanges.

Meaning of commodities exchanges :

The terms “commodities” and “futures” are often used to describe commodity

trading or futures trading. You can think of them as generic terms to describe the

markets. It is similar to the way “stocks” and “equities” are used when investors

talk about the stock market. To be more specific, this is what they really mean:

Commodities are the actual physical goods like corn, soybeans, gold, crude oil,

etc. Futures are contracts of commodities that are traded at a futures exchange like

the Chicago Board of Trade (CBOT). Futures contracts have expanded beyond

just commodities; now there are futures contracts on financial markets like the

S&P 500, t-notes, currencies and many others.

How do Futures Work?

Futures are standardized contracts among buyers and sellers of commodities that specify

the amount of a commodity, grade / quality and delivery location. Commodity trading

with futures contracts takes place at a futures exchange and, like the stock market, is

entirely anonymous.

For example: the buyer might be an end-user like Kellogg’s. They need to buy corn to

make cereal. The seller would most likely be a farmer, who needs to sell his corn crop.

They create a contract of December Corn futures at the current market price. A contract

of corn at the CBOT consists of 5,000 bushels. Therefore, the farmer would have to

deliver 5,000 bushels of corn to Kellogg’s in December at a designated location.

Making Money in Futures

A speculator is someone who invests in a business with the goal of turning a profit. In the

case of commodities, speculators are traders who try to buy futures low and sell them

high to make money. The reason why speculators can do so with futures is that traders

aren’t required to hold the futures contracts for the duration of the contract; they can buy

or sell anytime they want. So, to use the Kellogg’s example above, a speculator could buy

the corn contract from the farmer at a certain price, then wait for the price of corn to go

up before selling the contract to Kellogg’s, even if the contract won’t come due for

another couple of months, turning a profit in the process.

Players Involved in Commodities Trading

There are three different types of players in the commodity markets:

Commercials:

The entities involved in the production, processing or merchandising of a

commodity. For example, both the corn farmer and Kellogg’s from the example

above are commercials. Commercials account for most of the trading in commodity

markets.

Large Speculators:

A group of investors that pool their money together to reduce risk and increase gain.

Like mutual funds in the stock market, large speculators have money managers that

make investment decisions for the investors as a whole.

Small Speculators:

Individual commodity traders who trade on their own accounts or through a

commodity broker. Both small and large speculators are known for their ability to

shake up the commodities market.

How to Start Trading Commodities

In order to trade commodities, you should educate yourself on the futures contract

specifications for each commodity and of course learn about trading strategies.

Commodities have the same premise as any other investment – you want to buy low and

sell high. The difference with commodities is that they are highly leveraged and they

trade in contract sizes instead of shares. Remember that you can buy and sell positions

whenever the markets are open, so rest assured that you don’t have to take delivery of a

truckload of soybeans.

What Does Commodity Futures Contract Mean?

An agreement to buy or sell a set amount of a commodity at a predetermined price and

date. Buyers use these to avoid the risks associated with the price fluctuations of the

product or raw material, while sellers try to lock in a price for their products. Like in all

financial markets, others use such contracts to gamble on price movements.

INDIAN COMMODITY EXCHANGES MARKET SHARES :

INDIAN COMMODITY EXCHANGES MARKET SHARES

NMCE, 4%

Other regional

exchanges, 3%

NCDEX, 34%

MCX, 59%

NMCE

Other regionalexchanges

NCDEX

MCX

Source:MCX

GOLD

Gold is the oldest precious metal known to man. Therefore, it is a timely subject for

several reasons. It is the opinion of the more objective market experts that the traditional

investment vehicle of stocks and bonds are in the areas of their all time highs may be due

to for a severe correction.

To fully appreciate why 8000 years of experience say “gold is forever”, we should

review why the world reveres what Engand most famous economist, John Maynard

Keynes, has cynically called the “barbarous relic”.

How to Trade Gold Futures in India

The price of gold depends on a host of factors, which makes it very difficult to predict. In

a fashion similar to shares, gold is an asset class by itself. In fact, in many villages and

small towns of India, gold is preferred to bank deposits as a savings and investment

instrument. 

Till a year ago, to gain from price volatility, one would have to hoard and trade in gold

physically. Not any more, however. With the commodity futures market operating in full

swing, one has the option of not physically stocking gold to gain from its price

movements. 

Let us see how trading in futures is better than the option of hoarding gold. Firstly, there

are several costs associated with the process of physically stocking gold. The costs

include the cost of the gold itself, the cost of carrying, cost of physical storage, finance

cost and last, but not the least, the safety element. 

While futures might have some advantages, there is also a danger of losing big as your

risks are also magnified and hence, one must tread carefully in this area. 

In this context, if the going cost of gold is Rs 6000 per 10 grams, with an investment of

Rs 6 lakh, one can buy 1kg of gold. Now, suppose, three months hence, when the going

price of gold is Rs 6,500 per 10 grams, the person decides to sell the gold. The gross

profit made by the person is Rs 500 for every 10 grams and hence, for 1 kg, it stands at

Rs 50,000. To arrive at the net profit, one would have to deduct the cost of financing; the

cost of storage in a bank and transaction costs, including sales taxes. 

Now, let’s see what the same Rs 6 lakh can achieve in a futures market, assuming the

same sequence of prices. In Indian exchanges, currently, futures contracts up to four

months are available. Let’s assume that three-month gold futures are trading at a little

over the spot price, with the market expecting gold prices to remain stable over the next

three-month period. Let this price be Rs 6050. 

Since a futures contract is an obligation to buy or sell a specific quantity of the

commodity, one does not have to pay for the entire value of the commodity. Buying

futures obligates one to take delivery of the underlying commodity at a particular date in

the future. This is also known as taking a long position. 

To trade in gold futures, one has to go to a brokerage house and open a trading account.

A trading account involves keeping an initial deposit of Rs 50,000 to Rs 1 lakh. Part of

the money accounts for the margin money, which is required by the exchange when one

enters trading. 

For a high amount, however, the deposit amount is usually waived by the brokerage

house. The whole investment is then generally treated as margin money. For commodity

futures, there is usually a lot size or the minimum volume of the commodity of which one

has to buy a futures contract.

INDIAN GOLD MARKET:

Gold is valued in India as a saving and investment vehicle and is the second

preferred investment after bank deposits.

India is the world’s largest consumer of gold in jewellery as investment.

In July 1997 the RBI authorized the commercial banks to import gold for sale or

loan to jewelers and exports. At present 13 banks are active in import of gold.

The gold hoarding tendency is well ingrained in Indian society.

Domestic consumption is dictated by monsoon, harvest and marriage season.

Indian jewellery off take is sensitive to price increases and even more so to

volatility.

In the cities gold is facing competition from the stock market and a wide range of

consumer goods.

Facilities for refining, assaying, making them into standard bars in India, as

compared to the rest of the world, are insignificant, both qualitatively and

quantitatively.

METHOD OF INVESTING IN GOLD:

Bullion

Coins

Gold certificates

Gold accounts

Gold shares

FORTNIGHT GOLD FUCTUATIONS VALUES FROM JAN TO DEC 2009 AND 2010

CRUDE OIL

Crude oil is a mixture of hydrocarbons that exists in a liquid phase in natural

underground reservoirs. Oil and gas account for about 60 per cent of the total

world's primary energy consumption.

Almost all industries including agriculture are dependent on oil in one way or

other. Oil & lubricants, transportation, petrochemicals, pesticides and insecticides,

paints, perfumes, etc. are largely and directly affected by the oil prices.

Aviation gasoline, motor gasoline, naphtha, kerosene, jet fuel, distillate fuel oil,

residual fuel oil, liquefied petroleum gas, lubricants, paraffin wax, petroleum coke,

asphalt and other products are obtained from the processing of crude and other

hydrocarbon compounds.

The prices of crude are highly volatile. High oil prices lead to inflation that in turn

increases input costs; reduces non-oil demand and lower investment in net oil

importing countries.

Categories of Crude oil

West Texas Intermediate (WTI) crude oil is of very high quality. Its API gravity

is 39.6 degrees (making it a "light" crude oil), and it contains only about 0.24

percent of sulphur (making a "sweet" crude oil). WTI is generally priced at about a

$2-4 per-barrel premium to OPEC Basket price and about $1-2 per barrel premium

to Brent, although on a daily basis the pricing relationships between these can very

greatly.

Brent Crude Oil stands as a benchmark for Europe.

India is very much reliant on oil from the Middle East (High Sulphur). The OPEC

has identified China & India as their main buyers of oil in Asia for several years to

come.

Crude Oil Units (average gravity)

1 US barrel = 42 US gallons.

1 US barrel = 158.98 liters.

1 tonne = 7.33 barrels.

1 short ton = 6.65 barrels.

Note: barrels per tonne vary from origin to origin.

Source: crude survey

Global Scenario

Oil accounts for 40 per cent of the world's total energy demand.

The world consumes about 76 million bbl/day of oil.

United States (20 million bbl/d), followed by China (5.6 million bbl/d) and Japan

(5.4 million bbl/d) are the top oil consuming countries.

Balance recoverable reserve was estimated at about 142.7 billion tones (in 2002),

of which OPEC was 112 billion tones. .

Indian Scenario

India ranks among the top 10 largest oil-consuming countries. 

Oil accounts for about 30 per cent of India's total energy consumption. The

country's total oil consumption is about 2.2 million barrels per day. India imports

about 70 per cent of its total oil consumption and it makes no exports. 

India faces a large supply deficit, as domestic oil production is unlikely to keep

pace with demand. India's rough production was only 0.8 million barrels per day.

The oil reserves of the country (about 5.4 billion barrels) are located primarily in

Mumbai High, Upper Assam, Cambay, Krishna-Godavari and Cauvery basins.

Balance recoverable reserve was about 733 million tones (in 2003) of which

offshore was 394 million tones and on shore was 339 million tones.

India had a total of 2.1 million barrels per day in refining capacity.

Government has permitted foreign participation in oil exploration, an activity

restricted earlier to state owned entities. 

Indian government in 2002 officially ended the Administered Pricing Mechanism

(APM). Now crude price is having a high correlation with the international market

price. As on date, even the prices of crude bi-products are allowed to vary +/- 10%

keeping in line with international crude price, subject to certain government laid

down norms/ formulae.

Disinvestment/restructuring of public sector units and complete deregulation of

Indian retail petroleum products sector is under way.

Prevailing Duties & Levies on Crude Oil

Particulars Rates

Basic Customs Duty  10%

Cess Rs.1800 per metric tonne

NCCD* Rs.50 per metric tonne

Education cess 2%

Octroi 3%

War fedge Rs.57 per metric tonne

  Market Influencing Factors

OPEC output and supply. 

Terrorism, Weather/storms, War and any other unforeseen geopolitical factors

that causes supply disruptions. 

Global demand particularly from emerging nations.

Dollar fluctuations.

Refinery fires & funds buying.

Exchanges dealing in crude futures

The New York Mercantile Exchange (NYMEX). 

The International Petroleum Exchange of London (IPE). 

The Tokyo Commodity Exchange (TOCOM).

Impact of Crude Price Hike on the Indian Companies

Crude at USD 100 per barrel is going to have an adverse impact on marketing companies,

especially if you look at the product price under recoveries which are going on.

Petroleum has an under recovery of nearly Rs 9.5, diesel Rs 11.3, LPG Rs 380 per

cylinder, and kerosene Rs 21. So, that is a huge under recovery burden which the industry

is carrying as of now. This includes marketing, which has to be shared equally between

marketing companies, upstream companies, and the government.

 

At the beginning of the year, the government has approved nearly Rs 24,000 crore in oil

bonds. They have issued Rs 12,000 crore for Q1 and Q2, and the remaining has to be

issued to oil marketing companies. In the first half of the year, when oil bonds were

issued to companies, oil-marketing companies took the biggest hit in terms of sharing of

subsidy while the burden for upstream companies was much lower. It is likely that in the

second half of the year, the burden may shift to upstream companies. This means

companies like ONGC and Oil India might be hit because of this additional burden which

they might have to take because of crude going to USD 100 per barrel.

 

The Indian crude basket is trading at USD 92.29 per barrel, which is its all-time high.

This is the highest since November 26, when the Indian basket was trading at USD 92.13

per barrel.

 

The average for FY08 comes to around USD 74.58 per barrel. Compared to FY07, the

average was around USD 62.46 per barrel. This is an about USD 12 increase in the Indian

basket of crude. So, that impact which will be there.

The subsidy burden will be shared in FY08 was estimated at around Rs 54,900 crore.

That is expected to touch nearly Rs 60,000 crore. Upstream companies were bearing a

burden of nearly Rs 18,000 crore. This burden is expected to go over Rs 20,000 crore.

According to ONGC’s Chairman, the company expects their burden to go over Rs 20,000

crore in FY08. This basically means that ONGC will have to bear a major chunk of that

burden for upstream companies.

With international crude prices within touching distance of $100 per barrel, the

Government is basically left with two choices – either revise domestic retail prices of

petrol and diesel or look for a fresh package to compensate the state-owned oil marketing

companies (OMCs), which could be in the form of an enhanced bonds issue along with a

possible readjustments of duties on petroleum products.

CRUDE OIL VALUE FROM JAN 2007 TO DEC 2009 AND 2010

Last 3 years

US DOLLAR (CURRUNCY FUTURE)

This is a future contract in which currencies are used as underlying assets. In

India, Currency Future was introduced in 2008. The Combination for dealing was

decided USDINR. It is traded in MCX,NSE & BSE. Now due to its success RBI is

thinking for introducing three more pairs.

There are a number of factors which effect the trading of currency future in Indian Stock

Market:

BENEFITS TO INDUSTRY FROM FUTURE TRADING:

Hedging the price risk associated with future contractual commitments.

Spaced out purchases possible rather than large cash purchased and its

storage.

Efficient price discovery prevents seasonal price volatility

Greater flexibility, certainty and transparency in procuring commodities

would aid bank lending.

Facilitate informal lending

Hedged position of producers and processors would reduce the risk of

default faced by banks.

Lending for agriculture sector would go up with greater transparency in

pricing and storage.

Commodity exchanges to act as distribution network to retail agri-finance

from bank to rural households.

Providing trading limit finance to traders in commodities exchanges.

STATUS CHECK ON CURRENCY FUTURES IN INDIA:

As of now, the combined average daily turnover of the currency futures contracts in all

the three exchanges increased from USD 1.1 billion in March 2009 to 2.5 billion in

September 2009 – which means a growth of more than 125 per cent in just six months

period. These developments are very good from the market point of view. More volumes

result in better price discovery and more opportunities for traders, investors, genuine

hedgers, speculators and arbitrageurs.

(It may be noted that the volumes, no. of contracts, o/s open interest and other figures

given in the following pages pertain to only currency futures as relate to USD-INR

currency pair. Till January 18, 2010; only trading of currency futures in the US Dollar-

Indian Rupee pair on three recognized stock exchanges were allowed by Reserve Bank of

India.)

TOTAL TRADED VALUE-ALL EXCHANGES (RS IN CRORE)

Table 1: Traded volumes on all exchanges for USD-INR pair (Data: SEBI)

2915763

17429

31140

45805 48404

63963

99464

77244

124900

143348

184813

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

200000

Aug.08 Sept.08 Oct.08 Nov.08 Dec.08 Jan.09 Feb.09 Mar.09 Apr.09 May.09 Jun.09 Jul.09

As can be seen from the above table, the trading volumes on these exchange traded

currency futures have risen tremendously in the last one year. Let us take note of the

volume increase between December 2008 and July 2009. The volumes have surged by

four times during that period from Rs. 0.46 lac cr. to about Rs. 1.85 lac cr. The

cumulative volume between August 2008 and July 2009 works out to Rs 8.50 lakh crore

(Latest data available is up to July 2009).

During FY 2008-09, total traded volume was only Rs 869 crore on BSE; practically this

exchange is out of the currency futures market. In the last six months of the current

financial year, there are practically no volumes on BSE.

MONEY SUPPLY

In economics, money supply or money stock, is the total amount of money available in

an economy at a particular point in time. There are several ways to define "money," but

standard measures usually include currency in circulation and demand deposits.

Money supply data are recorded and published, usually by the government or the central

bank of the country. Public and private-sector analysts have long monitored changes in

money supply because of its possible effects on the price level, inflation and thbusiness

cycle [ That relation between money and prices is historically associated with the quantity theory of money.

There is strong empirical evidence of a direct relation between long-term price inflation

and money-supply growth. These underlie the current reliance on monetary policy as a

means of controlling inflation. This causal chain is however contentious, with some

heterodox economists arguing that the money supply is endogenous and that the sources

of inflation must be found in the distributional structure of the economy.

TYPE OF MONEY

M0: In some countries, such as the United Kingdom, M0 includes bank reserves,

so M0 is referred to as the monetary base, or narrow money

MB: is referred to as the monetary base or total currency. This is the base from

which other forms of money (like checking deposits, listed below) are created and

is traditionally the most liquid measure of the money supply.

M1: Bank reserves are not included in M1.

M2: represents money and "close substitutes" for money. M2 is a broader

classification of money than M1. Economists use M2 when looking to quantify

the amount of money in circulation and trying to explain different economic

monetary conditions. M2 is a key economic indicator used to forecast inflation

M3: Since 2006, M3 is no longer published or revealed to the public by the US

central bank. However, there are still estimates produced by various private

institutions.

MZM: Money with zero maturity. It measures the supply of financial assets redeemableat par on demand.

Objectives of study

Primary objective:

To know the impact of money supply on fluctuations of gold, crude prices and us doller

Secondary objectives:

To know the volatility in crude oil, us doller and gold

To know the contribution of commodity future in total commodity market.

To understand the importance of commodity future derivatives market in India

To know the relationship between gold, crude oil and us doller

Theoretical Framework

Constructs of study

TO STUDY THE IMPACT OF MONEY SUPPLY ON COMMODITY FUTURES

GOLD, CRUDE AND US DOLLER VOLATILITY

Dependent variables:

Fluctuation in gold trade

Fluctuation in crude oil

Fluctuation in US dollar

Independent variables

Money supply

Intervening variable

Market volatility

Literature Survey & Review

TEXT BOOKS: Gupta S.L., “Financial Derivatives,” Prentice Hall Of India, New

Delhi,2007,pp.3-27

From this book I will be able to learn about the basic concept of Derivatives.

Academicians claim that derivatives offer certain economic benefits such as risk sharing,

efficient allocation of capital, information gathering and price discovery. And yet, there

are widely held apprehensions about their potential to destabilize their financial markets.

Indeed the losses suffered in the past by even some of the well managed companies

indicate the statement that derivative trading is risky. This article juxtaposes the

economic benefits along with the inherent risks of derivative products and cautions that

they must be traded with care to maximize benefits and mitigate risks.

Taylor Francesca “Mastering Derivatives Market” Pearson Power, An imprint of

Pearson Education

From this book I came to know about the history of oil commodity future.

Hull John C., “Options, Future & Other Derivatives,” Prentice Hall Of India,

New Delhi,pp.469-479

From this book I will be able to learn about Volatility in Future Market In India. This

article investigates the changes in volatility in the commodity Market after the

introduction of derivatives. There is strong evidence of a reduction in the volatility of the

underlying shares after the introduction of derivatives. This is largely attributable to a

reduced persistence in the previous day's volatility. However, the intraday unconditional

volatility of the equity index increases. This contradiction is explained by an increased

correlation between the prices of its constituent shares caused by arbitrage transactions in

the cash market.

Alan C.Shapiro “Multinational Financial Management”. Edition-4th, 2002, printice hall

of India private limited New Delhi. Page -478-492: tell about the commodity market

and their dealing and about the benefits of the future commodity trading. Apart from

this it also tell about the flexibility certainty, hedging the price risk associated with

future contractual commitments, trading limits to traders in commodity exchanges,

hedged position of producers and processors and reduction of the default risk faced by

banks.

Brookes Robert, “Derivatives & Risk Management Basics,” Cengage Learn India,

Delhi,pp.474-506

This book will tell me about the role of different risks involved in derivative markets.

There are various risk such as Credit Risk & Interest Rate Risk in Indian Market & The

ways How can it be Measured.

Miller W Thomas, “Derivatives,” Z. A Printers, Delhi,pp.87-112

This book contains a lot of information regarding Derivatives but the best part I found is

the mechanism of future pricing in Derivative market, what various factors effect the

pricing of the future derivatives.

Miller W Thomas, “Derivatives,” Z. A Printers, Delhi,pp.144-151

This book will be able to tell about Different types of Derivatives. the role of currency

future derivatives , when it was introduced & How does the Price Fluctuations occurs &

How does price fluctuations effect the contracts of future derivative market.

A.Dubofsky David, “ Derivative valuation And Risk Management” Newyork

Oxford University Press 2003

This book will help me to learn about the forward price and commodity and also help me

to know about the “convenience yield”

WEBSITES:

http://ncdex.com/

This will enable me to learn me about the Recent Trend in Commodity market http://ncdex.com/product/Precious_Metals.aspx?comm=GLD

This will enable me to know about the gold trend in commodity market

http://mcx.com/result.php This will enable me to know about the different behaviour of different commodity

https://www.kitcomm.com/archive/index.php?t-38609.htm

This will know about the trend of trade in to the commodity market

http://goldprice.org/

This .will enable to know the gold price fluctuations http://nymex.com/

This will enable me to know the crude oil trend and the sport price of crude oil

http//www.currencyfutureinindiastatuschequeafteroneyear.vrk100-27102009.htm

This will enable me to learn me about the status after one of introducing USDINR

currency future in India..

http//www.bseindia.com/cds/faqs.asp

This will help me to learn about Trading of currency future on bse & it’s turnover.

JOURNALS:

The Journal Of Finance, June 09,Vol.64

“Oil Future Price in Production Economy With Investment Constraints ” By Kogan

Leonid, Livdan Dmitry,Yaron Amir

This study says that there is relationship between the volatility of future price and the

slope of the forward curve has v-shape.

Finance India , Dec.07, Vol. XXI, No. 4

“ Does The Introduction Of Derivatives Affect The Underlying Return Volatility?” By

Wejda Ochi

In this Study, an empirical analysis of the relation between the future market & the Euro

spot market is presented. Two aspects of this relation has been analysed , the effect can

be on volatility due to introduction of of derivatives in india & interaction between level

of exchange on the futures market & variability on the returns.

Finance India , Sept..07, Vol. XXI, No.4

“Effect if Derivative on Volatility – A Study in Context of Indian Stock Market” By

Srivastva Sandeep

This research paper says about the impact of the introduction of the derivative market in

to the Indian stock marker when it entered in to the Indian stock market and after the

coming what was the volatility occurs.

Finance India, Sept..07, Vol. XXI, No. 3,pp.987-1002

“A Study Of Market Efficiency & Volatility In The Indian Stock Market, Forex Market

& Bullion Market” By Bikas Kumar Ghosh

This paper suggests that Forex, stock & Silver markets are efficient as compared to gold.

On the other hand, Forex Market, which is observed to possess lower degree of Market

Efficiency next after gold, is the highest volatile market.

Global business review

“Efficiency and Future Trading – Price Nexus in Indian Commodity Future Market” By

Sahoo Parvakar

This study says about the efficiency and future trading price of commodity

market in the context of 5 commodity which include Gold, and Silver. It also give

information about the origin of commodity market and the structure of the

commodity market. Information about the relationship between the future

market & inflation also.

NEWSPAPERS:

Business Standard, 12November, 2009

Research Methodology

Research methodology is a way to systematically solve the problem. It is a game plan for

conducting research. In this we describe various steps that are taken by the researcher,

“All progress is born of inquiry. Doubt is often better than overconfidence, for it

leads to inquiry and inquiry leads to invention.”

Research in a common parlance is a search for knowledge. Research is an art of scientific

and systematic investition. Thus research comprises defining and redefining problems,

formulating hypothesis or suggested solutions; collecting, organizing and evaluating data,

making deductions and reaching conclusions. Research methodology is the arrangement

of condition for collection and analysis of data in a manner that aims to combine

relevance to the research purpose with economy in procedure. Research Methodology is

the conceptual structure within which research is conducted. It constitutes the blueprint

for the collection measurement and analysis of the data.

Research methodology is a framework for the study and is used as a guide in collecting

and analyzing the data. It is a strategy specifying which approach will be used for

gathering and analyzing the data. it also includes time and cost budget since most studies

are done under these two constraints. The research methodology include over all research

design, the sampling procedure, the data collection method and analysis procedure.

Issues regarding research are:

To gain familiarity with the phenomenon or to achieve new insight into it.

To portray accurately the characteristics of a particular individual, situation or

group.

To determine the frequency with which something occur.4

Significance of Research

Research provides the basis for all government policies in our economic system.

It has its special significance in solving various operational and planning issues of

business and industry.

For professional in research methodology, research may mean a source of live

hood.

Research Design

This part contains relevant information pertaining to research design and methodology

used in the research project. The research design has been distinctive described to the

objective of the study.

There are three types of research design that are used frequently used by the various

researchers. These are:

Exploratory research

Descriptive research

Causal research

Sources of Data

Data used in research can be of any form. It can be primary data or the secondary data.

Secondary data is one, which has already been collected or is made publicly available

in the past and the researcher has just made some modifications in the data according to

the requirement.

This research project consists the study of reasons and impact of rupee appreciation. In

this research project only secondary data has been used. This is collected from different

websites of the Internet, through magazines, newspapers and various journals.

THE RESEARCH PROCESS:

1 . COLLECTION OF DATA :-

2PRELIMINARY

DATA GATHERING

Interviewing Literature Survey

3PROBLEM

DEFINITIONResearch Problem

Delineated

4THEORETICAL FRAMEWORK

Variables clearly identified and

labelled

5

GENERATION OF

HYPOTHESES

6SCIENTIFI

C RESEARCH DESIGN

1OBSERVATION

Broad area of research interest

identified

7DATA COLLECTION,

ANALYSIS AND INTERPRETATION

8DEDUCTION Hypotheses substantiated? Research question answered?

9Report writing

10Report Presentation

11Managerial decision making

YesNO

Both the primary & secondary data has been collected from the market & company. The

company provided the secondary data & primary data is collected through the medium of

face-to-face interaction & interview from various persons in the enterprise.

2. ORGANISATION OF DATA :

Data once collected the further processing is done, the data collected by me are carefully

done through in a useful & relevant manner &properly organized.

3. PRESENTATION OF DATA :-

The data collection is of no use unless & until it is given in the presentable form. Thus

after proper organization the data is given in presentable form with the complete details,

with the help of bar diagram, pie carts etc.

4. ANALYSIS OF DATA :-

The data is carefully analyzed keeping in the consideration both the pros & cons for the

purpose of arriving at concrete conclusion.

5 . INTERPRETATION OF DATA :-

After carefully analyzed the data, it has been aptly interpreted in order to give concrete

conclusion & proper recommendation.

RESEARCH DESIGN:

Research design involves a series of rational decision making benefits at each point from

such sophisticated design to ensure accuracy, confidence and commensurate with large

investment of resources.

Purpose of study:

Exploratory

Descriptive

Hypothesis testing

The purpose of my study is descriptive. A descriptive study is undertaken in order to

ascertain be able to describe the characteristics of variables of interest in a situation.

It is also hypothesis testing also. Because studies that engage in hypothesis testing usually

explain the nature of certain relationship or establish the difference among groups or

independence of the two or more factors in the situation.

Types of investigation:

Establishing

Casual relationship

Correlation

Group differences, ranks etc.

Type of investigation in my study will be correlation. Because my main motive is to

check whether there is significant relationship between balance of payment(BOP) and

money supply (dependent variables) and crude prices, silver prices and gold prices

(independent variables). So investigation type will be correlation type

Extent of researcher interference in study:

Minimal: studying events as they normally occurs

Manipulation and/or control and/or simulation

The extent of research interference in my study will be minimal. I’ve to just collect and

analyze the data for findings. There will be no need for simulation tests etc.

Study setting:

Contrived

Non-contrived

This includes field study, field study and lab experiment.

My study is using the same natural environment/data.

Measurements and measures:

Operational definition

Items (measures)

Scaling

Categorization

Coding

Measurements and measures for my study will be scaling that is interval scaling.

Units of analysis (population to be studied):

Individuals

Dyads

Groups

Organization

Machines etc.

The units of analysis or the population that will be studied in my research will be

commodity prices and values of BOP as well as of money supply.

Sampling design:

It is a definite plan for obtaining a sample from sampling frame. It is determined before

collection of data.

Sampling size for my study will be of 24 fortnights. In other words sampling size will be

24 i.e. half monthly data of one year that is 2008.

Time horizon:

One shot (cross sectional)

Longitudinal

The time horizon for my study will be longitudinal. In this type of time horizon the data

is collected monthly, quarterly etc to find out the monthly, quarterly changes in ratios and

trend etc. I’ll collect data on fortnight basis to know the impact of fluctuations on the

BOP and money supply in last one year. So it will be longitudinal.

DATA COLLECTION:

Secondary data:

It is the data, which has already collected by some organization for some purpose or

research study. The data for my study has been collected from various. Secondary data

means that data that are already available i.e. refers to data which has already been

collected and analyzed by someone else. The sources used in this case are-

1. Books

2. Journals

3. Magazines

4. Internet sources

5. Newspapers

Data collection method:

Primary data

Secondary data

Interviewing

Questionnaires

Observations

Unobtrusive methods.

Data analysis:

Feel for data

Goodness of data

Hypothesis testing

For data analysis mostly the hypothesis testing will be used. By using spss software it

will be performed. Statistical tools will also be used. Analytical tools will also be used.

SAMPLING AND SAMPLING DESIGN

A sampling design is a definite plan for obtaining a sample from a given population.

While selecting a sampling design, one must ensure that the procedure causes a relatively

small sampling error and helps to control the bias in a better way.

The sampling procedure followed is as follows:

1. Identification of the Universe : The universe to be studied is finite and includes the

industries

2. Defining a Sampling unit : Here the sampling unit is an industrial unit (small,

medium or large) where the industrial units are classified as small, medium and large on

the basis of their annual turnover

3. Determining the size of the sample : Taking into consideration the size of the sample,

the population variance , cost involved and the requirements of efficiency, representative

ness , reliability, flexibility, and the parameters of interest in the research

4 .Sampling procedure:

The sampling design used is Probability Sampling (Simple Random Sampling

Without Replacement ).The use of this sampling design is due to the fact that it follows

the Principle of Statistical Regularity which states that if on an average, the sample

chosen is a random one, the sample will have the same composition and characteristics as

that of the universe. Moreover, with probability sampling, we can measure the errors of

estimation which brings out the superiority of random sampling design over the other

ones.

GARCH MODEL

The positive correlation between volumes and volatility found for most of the exchange

is unlikely to be a reflection of changes in the number of traders active in these markets.

These changes appear rather to have occurred in the last 2009, when banks increasingly

moved into emerging markets, and after the recession, when the sharp fall in turnover

was accompanied by a significant decline in the number of traders. A more plausible

explanation for the positive correlation between turnover and volatility is that both

variables are driven by the arrival of new information.

To test this hypothesis, I split volatility and trading volumes into expected and

unexpected components. I use estimates from a GARCH(1,1) model to describe expected

volatility. This model appears to fit the time series well. Ideally, volatility implied in

option prices could be used, since there is evidence that it outperforms GARCH models

in providing forecasts of future volatility.

However, future contracts for currencies of emerging market countries are not very

liquid.

The GARCH(1,1) model can be written as:

Following a practice common in the literature, the GARCH model is fitted on the entire

time series, thus yielding in sample forecasts.

where Rt is the return, its mean and ht its conditional variance at time t.

Why use GARCH:

GARCH modeling builds on advances in the understanding and modeling volatility in

the last decade. It takes into consideration excess kurtosis (i.e. fat tail behavior) and

volatility clustering, two important characteristics of financial time series. It provides

accurate forecasts of variances and co-variances of asset return through its ability to

model time varying conditional variances. As a consequence you can apply GARCH

model to such diverse field such as risk management, portfolio management and asset

allocation, opinion pricing, foreign exchange and term structure of interest rates.

You can find highly significant GARCH effects in equity market not only for individual

stocks but for stock portfolio and equity future.

GARCH ON CRUDE OIL PRICES FROM JAN 2008 TO DEC 20 09

GARCH(1,1) estimation of y

Method: ML - BFGS with analytical gradient date: 03-12-10 time: 11:58 Included observations: 464 Convergence achieved after 31 iterations Coefficient Std. Error z-Statistic Prob. Omega 909.7603 5054.333 0.179996 0.857156alpha_1 6.5E-05 3.200431 2.03E-05 0.999984beta_1 0.904424 3.251956 0.278117 0.780923 Log Likelihood -2625.31 Jarque Bera 43.62834 Prob 3.36E-10Ljung-Box 339.1585 Prob 0

INTERPRETATION

In the above graphs there could be seen high fluctuations in the daily settlement prices of

commodity future of gold in mcx & the same is represented by the value of Alpha &

Beta, the high fluctuations in the daily settlement prices represents & symbolises the

instability as well as the inefficiency, which is not a good symbol for the market

efficiency.

As the values in the table are much near than one which shows that it is not good for

Indian economy.

Verification of crude pridiction

GARCH(1,1) estimation of y

Method: ML - BFGS with analytical gradient date: 03-17-10 time: 15:11 Included observations: 45 Convergence achieved after 32 iterations Coefficient Std. Error z-Statistic Prob. Omega 9.863551 685883.2 1.44E-05 0.999989alpha_1 0.000287 239.4974 1.2E-06 0.999999beta_1 0.996356 250.5591 0.003977 0.996827 Log Likelihood -254.898 Jarque Bera 2.673574 Prob 0.262688Ljung-Box 0.001644 Prob 0.967659

INTERPRETATION

the above graph shows that what the prediction has produce by the old data is true to see the trend line of the new data of crude prices

GARCH ON GOLD PRICES FROM JAN 2008 TO DEC 2009

GARCH(1,1) estimation of y

Method: ML - BFGS with analytical gradient  date: 03-17-10  time: 15:02  Included observations: 503  Convergence achieved after 7 iterations     

  CoefficientStd.

Errorz-

Statistic Prob.   omega 7623.36 9330265 0.000817 0.999348alpha_1 0.023638 69.21263 0.000342 0.999728beta_1 0.968659 69.98129 0.013842 0.988956         Log Likelihood -4137.95  Jarque Bera 37.95282 Prob 5.74E-09Ljung-Box 0.15228   Prob 0.696366

INTERPRETATION

In the above graphs there could be seen high fluctuations in the daily settlement prices of

commodity future of gold in mcx & the same is represented by the value of Beta, the

high fluctuations in the daily settlement prices represents & symbolises the instability as

well as the inefficiency, which is not a good symbol for the market efficiency.

As the values in the table are much near than one which shows that there is high

speculation in the past time in gold.

Verification of GOLD pridiction

GARCH(1,1) estimation of y

Method: ML - BFGS with analytical gradient  date: 03-17-10  time: 15:05  Included observations: 51  Convergence achieved after 39 iterations     

  Coefficient Std. Errorz-

Statistic Prob.   omega 450.0008 4.26E+08 1.06E-06 0.999999alpha_1 3.95E-05 568.6453 6.94E-08 1beta_1 0.997566 606.1444 0.001646 0.998687         Log Likelihood -422.439  Jarque Bera 1.706567 Prob 0.426014Ljung-Box 6.18E-06   Prob 0.998016

INTERPRETATION

In the above graph the values alpha is low which indicats there is less risk in gold trading.. Volatility of gold price shows that gold has been less fluctuative in the past year.And according to the prediction of the above table.

GARCH ON DOLLAR PRICES FROM JAN 2008 TO DEC 2009

GARCH(1,1) estimation of y

Method: ML - BFGS with analytical gradient  date: 03-12-10  time: 12:05  Included observations: 516  Convergence achieved after 25 iterations     

  CoefficientStd.

Errorz-

Statistic Prob.   Omega 19.05934 32330.4 0.00059 0.99953alpha_1 0.000639 15.3587 4.16E-05 0.999967beta_1 0.962579 1.552985 0.619825 0.535373         Log Likelihood -2698.15  Jarque Bera 28913.36 Prob 0Ljung-Box 15.41039   Prob 8.65E-05

INTERPRETATION

As we can see that in the above table value of alpha is very less which indicates that there

was less risk in the trade of dollar. Above table shows that there is less fluctuation in the

past two year of the price of dollar.

Verification of DOLLAR pridiction

GARCH(1,1) estimation of y

Method: ML - BFGS with analytical gradient  date: 03-17-10  time: 15:10  Included observations: 50  Convergence achieved after 17 iterations     

  CoefficientStd.

Errorz-

Statistic Prob.   omega 0.122977 5413649 2.27E-08 1alpha_1 0.002256 4182.109 5.39E-07 1beta_1 0.997005 3571.222 0.000279 0.999777         Log Likelihood -258.091  Jarque Bera 1.186283 Prob 0.552589Ljung-Box 7.91E-06   Prob 0.997756

INTERPRETATION

In the above graph the values alpha is low which indicats there is less risk in gold trading.. Volatility of gold price shows that dollar has been less fluctuative in the past year.

Statistical tools

Granger causality

Granger causality test is a technique for determining whether one time series is useful

in forecasting another Ordinarily, regressions reflect "mere" correlations, but Clive

Granger, who won a Nobel Prize in Economics, argued that there is an interpretation of a

set of tests as revealing something about causality.

A time series X is said to Granger-cause Y if it can be shown, usually through a series of

F-tests on lagged values of X (and with lagged values of Y also known), that those X

values provide statistically significant information about future values of Y.

The test works by first doing a regression of ΔY on lagged values of ΔY. Once the

appropriate lag interval for Y is proved significant (t-stat or p-value), subsequent

regressions for lagged levels of ΔX are performed and added to the regression provided

that they 1) are significant in and of themselves and 2) add explanatory power to the

model. This can be repeated for multiple ΔXs (with each ΔX being tested independently

of other ΔXs, but in conjunction with the proven lag level of ΔY). More than one lag level

of a variable can be included in the final regression model, provided it is statistically

significant and provides explanatory power.

The researcher is often looking for a clear story, such as X granger-causes Y but not the

other way around. In practice, however results are often hard-to-interpret. For instance no

variable granger-causes the other, or that each of the two variables granger-causes the

second.

Why we use granger

Granger casuality test is an statistical tool which use f-test to know the cause and effect

relation ship between the two time series. With the help of this test we can find the right

direction o f the study.

Granger casuality on crude oil and money supply

Pairwise Granger Causality TestsDate: 04/04/10 Time: 10:54Sample: 1 24Lags: 2 Null Hypothesis: Obs F-Statistic Probability RCRUDE does not Granger Cause RMONEYSUPPLY

21 0.45517 0.64230

RMONEYSUPPLY does not Granger Cause RCRUDE

0.42835 0.65884

INTERPRETATION

As the significant level is 5% and from the above table calculated value are more than 5%

so the null hypothesis is rejected and alternate hypothesis is accepted .so we can conclude

that money supply has significant impact on trading of crude oil and vice-versa.

.

Granger casuality on gold and money supply

Pairwise Granger Causality TestsDate: 04/04/10 Time: 10:59Sample: 1 24Lags: 2 Null Hypothesis: Obs F-Statistic Probability RMONEYSUPPLY does not Granger Cause RGOLD

21 0.24116 0.78852

RGOLD does not Granger Cause RMONEYSUPPLY

2.95541 0.08085

INTERPRETATION

As the significant level is 5% and from the above table calculated value are more than 5%

so the null hypothesis is rejected and alternate hypothesis is accepted .so we can conclude

that money supply has significant impact on trading of gold and vice-versa.

Granger casulity on usdollar and money supply

Pairwise Granger Causality TestsDate: 04/04/10 Time: 11:02Sample: 1 24Lags: 2 Null Hypothesis: Obs F-Statistic Probability RMONEYSUPPLY does not Granger Cause RDOLLAR

21 3.48090 0.05558

RDOLLAR does not Granger Cause RMONEYSUPPLY

0.27732 0.76138

INTERPRETATION

As the significant level is 5% and from the above table calculated value are more than 5%

so the null hypothesis is rejected and alternate hypothesis is accepted .so we can conclude

that money supply has significant impact on trading of us dollar and vice-versa.

RegressionRegression is the study of the nature of relationship between the variables so that one

may be able to predict the unknown value of one variable for a known value of another

value.

“It is the measure of average relationship between two or more variables”.

Types of regression analysis:-

Simple and multiple regression: - In case of simple regression, we study only two

variables i.e. one dependent and one independent. But in case of multiple regression we

take more than two variables i.e. one dependent and other independent.

Linear and Non-linear regression: - When one variable changes with another variable

in some fixed ratio, it is called as linear regression. But if this ratio is not constant, it is

known as Non-linear regression.

Partial and Total regression: - If from more than two va

riables only two variables are taken into consideration. It is called as partial regression.

But all variables are taken into consideration at a single slank. It is called as total

regression

Regression on money supply and crude oil

Model Summaryb

Model R R Square

Adjusted R

Square

Std. Error of the

Estimate Durbin-Watson

1 .650a .422 .396 1945934.572 .928

a. Predictors: (Constant), moneysupply

Model Summaryb

Model R R Square

Adjusted R

Square

Std. Error of the

Estimate Durbin-Watson

1 .650a .422 .396 1945934.572 .928

b. Dependent Variable: crudeoil

INTERPRETATION:

From the above table as the value is R square is .422 hence we can conclude that

independent variable money supply explain 42.2% of the variation in dependent variable

crude oil.

Regression on money supply and gold

Model Summaryb

Model R R Square

Adjusted R

Square

Std. Error of the

Estimate Durbin-Watson

1 .468a .228 -.016 4714080.156 .859

a. Predictors: (Constant), moneysupply

b. Dependent Variable: gold

INTERPRETATION:

From the above table as the value is R square is .228 hence we can conclude that

independent variable money supply explain 22.8% of the variation in dependent variable

gold.

Regression on money supply and dollar

Model Summaryb

Model R R Square

Adjusted R

Square

Std. Error of the

Estimate Durbin-Watson

1 .365a .133 .094 2074469.753 .775

a. Predictors: (Constant), moneysupply

b. Dependent Variable: dollar

INTERPRETATION:

From the above table as the value is R square is .133 hence we can conclude that

independent variable money supply explain 13.3% of the variation in dependent variable

dollar.

CO-RRELATION

The correlation analysis refers to the techniques used in meaning the closeness of

the relationship between the variables. These two variables are:-

1. Static

2. Dynamic

Thus whenever two variables are so related that a change in the value of one is

accompanied by a change in the value of other, in such a way that an increase or

decrease in one variable is accompanied by an increase or decrease in the other,

then the variable are said to be correlated.

DEFINITION

“Correlation is an analysis of the co-variation between two or more variables”

A. M. Tuttle

“The effect of correlation is to reduce the range of uncertainty of one’s prediction”

Tippett

TYPES OF CORRELATION

Correlation is classified in several different ways. Three of the most important ways are:-

Positive and Negative Correlation: When two variable X and Y move in

same direction is Positive Correlation and when both variables move in

opposite direction that is Negative Correlation.

Simple, Partial and Multiple Correlations: When we study the relationship

between two variables only that is Simple Correlation. When three or more

variables are taken but relationship between any two of the variable is studied,

assuming other variables as constant that is Partial Correlation and when we

study the relationship among three or more variables that is Multiple

Correlation.

Linear and Curvi-Linear Correlation: when the ratio of change of two

variables X and Y remains constant throughout, then they are said to be Linear

Correlated and when the ratio of change between the two variables is not

constant but changing, then correlation is said to be Curvi-Linear.

DEGREE OF CORRELATION:-

Sr. No. Degree of

correlation

Positive Negative

1 Perfect correlation +1 -1

2 High Degree of

correlation

Between +.75

to+1

Between -.75 to-1

3 Moderate Degree of

Correlation

Between +.25

to+.75

Between -.25

to-.75

4 Low Degree of

Correlation

Between 0 to+.25 Between 0 to-.25

5 Absence of

Correlation

0 0

CORRELATION BETWEEN MONEY SUPPLY,CRUDE OIL,DOLLAR AND

GOLD

Correlations

Moneysupply gold crudeoil dollar

Moneysupply Pearson Correlation 1 .468 .650 .365

Sig. (2-tailed) .433 .001 .079

N 24 24 24 24

Gold Pearson Correlation .468 1 -.010 -.055

Sig. (2-tailed) .433 .962 .800

N 24 24 24 24

Crudeoil Pearson Correlation .650 -.010 1 .274

Sig. (2-tailed) .001 .962 .196

N 24 24 24 24

Dollar Pearson Correlation .365 -.055 .274 1

Sig. (2-tailed) .079 .800 .196

N 24 24 24 24

INTERPRETATION :

From the above table as the pearson correlation between money supply and gold is 46.8%

,between money supply and crude oil is 65% and between money supply and dollar is

36.5% hence we can conclude that all the above mentioned variable are moderate

correlated.

Reliability

Reliability Analysis

Reliability analysis is an engineering discipline that applies various mathematical

techniques to the measurement and prediction of the reliability of components and

systems. The components under study may be mechanical, electronic, software, or other

types. "Systems" could include anything from computers to rail transit. Measurements

include failure rates, cumulative failures, and component lifetimes (time until failure). A

variety of techniques are employed, drawn mainly from probability, statistics, and the

theory of stochastic processes

Scale: ALL VARIABLES

INTERPRETATION

The reliability test is applied to test the reliability of the data.The value of Chronbach’s

Alpha comes out to be positive which indicates that the data is reliable and internally

consistent.

Reliability Statistics

Cronbach's Alpha

Cronbach's Alpha Based on

Standardized Items N of Items

.9 .939 3